# Honoring Investment Gains: Understanding Its Significance and How to Do It Effectively
In favorable conditions within the investment landscape, there’s a tendency to revel in the exceptional returns. Why is that? During difficult periods, investors frequently experience significant psychological distress due to a phenomenon known as **loss aversion**. This principle articulates why the pain of losing $10,000 often eclipses the pleasure of earning the same sum. As we traverse the fluctuations of investing, it is crucial to acknowledge and celebrate our successes, fostering a healthier mindset as we approach later stages of life when financial stability can intertwine with our existence.
## Acknowledging and Honoring Your Extraordinary Investment Returns
### Assess Your Extraordinary Investment Returns and Celebrate
To genuinely savor the profits from your investments, adhere to these three steps:
1. **Assess Excess Returns:** Ascertain how much your investment portfolio has outperformed historical averages.
2. **Identify Rewards:** Reflect on what those additional returns enable you to enjoy or acquire.
3. **Reward Yourself:** Allocate a fraction of those excess returns for a meaningful treat.
Celebrating your investment accomplishments is essential; they signify the outcome of delayed gratification—a deliberate decision to invest rather than indulge right away. When your choices lead to unexpected favorable results, it’s even more crucial to celebrate.
### Illustrations of Excess Investment Return Assessments
#### 1. Starting Out
Picture yourself investing $10,000 that yields a 23% return in a year—resulting in a remarkable $2,300. Compared to the historical average return of the S&P 500 at 10%, your excess return amounts to 13%, or $1,300. Consider treating yourself to a delightful dinner or a new outfit, symbolizing the reward for your patience and wise investment decisions.
#### 2. Approaching Traditional Retirement (60-65)
For a 60/40 portfolio valued at $500,000 with a 14% growth (an impressive $90,000), the historical outlook for such a combination hovers around 9%, leading to an excess return of 5%, or $25,000. Even if direct access to these funds faces penalties, think about treating your partner to a lavish experience, like a week-long getaway at a sunny resort.
#### 3. Focused on FIRE (Financial Independence, Retire Early)
Suppose you’re 40 and planning to retire by 45. With a well-structured $2 million portfolio that produces an 18% return against a historical average of 9.8%, you’ve experienced an excess return of 8.2%—amounting to about $164,000. After considering investments in rental properties, your total excess returns escalate to $224,000, providing a wonderful chance to reward yourself with something special, like a new car.
## Warning: Avoid Spending All Your Excess Investment Returns
Utilizing all your returns can be risky; it jeopardizes a vital financial safety net during market downturns. Given that bear markets occur roughly every 4.8 years, it’s prudent to reserve some excess returns to endure these phases. Historically, bear markets span about ten months, making it wise to maintain sufficient funds to alleviate stress during declines.
### Prudent Spending Approach
A reliable guideline is to limit spending to no more than 10% of your excess returns, with a maximum of 20%. This approach allows you to relish your achievements while simultaneously protecting your portfolio from future unpredictabilities.
## Maximizing Your Gains
### My Excess Investment Returns from 2024
For example, my investments achieved a 34% return this year, resulting in considerable extra gains, especially since my main focus was on a diversified portfolio across various asset types. From my investment profits, I planned to spend between $5,250 and $10,500. By strategically selecting enjoyable and valuable items—such as traveling and upgrading technology—I was able to fully appreciate my financial accomplishments while also safeguarding a substantial part of my returns for future requirements.
### The Strength of Compounding
An extraordinary aspect of any investment journey is the strength of compounding. A well-managed investment portfolio can yield returns surpassing the total capital invested over time, effectively allowing one to earn “free money” simply by letting time work to their advantage. As illustrated in the growth of my retirement portfolio, this reinforces the importance of commencing investments as early as possible for significant long-term benefits.
## Conclusion: Celebrate Thoughtfully
The primary objective of investing should always be to enrich and enjoy life—not just to gather wealth that remains unspent. By celebrating our investment triumphs responsibly, we cultivate a positive relationship with money and prepare ourselves for unavoidable downturns. The majority of our excess returns can offer reassurance and a buffer against market fluctuations, enabling us to manage our financial future with greater confidence. Don’t hesitate to enjoy your hard-earned rewards—just remember to do so intentionally and wisely. Wishing you successful investing and fulfilling spending!